1. Chapter 3 The Household Households in the U.S. The Economics of the Household Marriage & Divorce Households in the U.S. The Economics of the Household Marriage & Divorce

2. I. Households (HH) in the U.S. 290 million people (2001) 109 million HH HH is people who occupy same housing unit (house, apt., dorm room) Family HH includes related people 290 million people (2001) 109 million HH HH is people who occupy same housing unit (house, apt., dorm room) Family HH includes related people

8. II. The Economics of the HH Decision to form a household Weigh benefits and costs Form HH if benefits > costs Over 75% of HH contain more than 1 person So must be benefits to forming multiperson HH focus on multiperson HH Decision to form a household Weigh benefits and costs Form HH if benefits > costs Over 75% of HH contain more than 1 person So must be benefits to forming multiperson HH focus on multiperson HH

9. Benefits/Costs to HH Economies of scale Externalities Transactions costs Risk sharing Economies of scale Externalities Transactions costs Risk sharing

10. Economies of scale mostly a benefit Things done on a large scale can be done more efficiently Many HH chores done for 1 person, are just as easy to do for 2 or 3 people mostly a benefit Things done on a large scale can be done more efficiently Many HH chores done for 1 person, are just as easy to do for 2 or 3 people

11. examplesexamples Cooking for 1 vs. 2 Cleaning, shopping, laundry In HH with more than 1 Less time spent PER PERSON on these tasks Tasks are shared Cooking for 1 vs. 2 Cleaning, shopping, laundry In HH with more than 1 Less time spent PER PERSON on these tasks Tasks are shared

12. Buying in bulk Share fixed costs of HH Furniture Appliances Bills (phone, cable…) Buying in bulk Share fixed costs of HH Furniture Appliances Bills (phone, cable…)

13. if HH is really large, diseconomies of scale as tasks take longer if HH is really large, diseconomies of scale as tasks take longer

14. ExternalitiesExternalities a benefit or cost consumption or production of a good or service, affects well-being of others (not just producer or buyer) a benefit or cost consumption or production of a good or service, affects well-being of others (not just producer or buyer)

15. positive externalities benefits to living in HH enjoy roommate’s good cooking enjoy listening to roommate’s CD roommate rents movie, you watch it too benefits to living in HH enjoy roommate’s good cooking enjoy listening to roommate’s CD roommate rents movie, you watch it too

16. negative externalities a cost to living in a HH roommate smokes snores is noisy has bad taste in music, decor, … a cost to living in a HH roommate smokes snores is noisy has bad taste in music, decor, …

17. transactions costs cost of acquiring goods & services cost of enforcing agreements may be benefit or cost to HH living cost of acquiring goods & services cost of enforcing agreements may be benefit or cost to HH living

18. lower transactions costs divide errands, chores higher transactions costs keeping track of who owes what coordinating schedules lower transactions costs divide errands, chores higher transactions costs keeping track of who owes what coordinating schedules

19. RiskRisk HH with multiple earners less likely to suffer financial distress HH with multiple earners better able to diversify employers investments HH with multiple earners less likely to suffer financial distress HH with multiple earners better able to diversify employers investments

20. Division of Labor we observe men tend to be larger earner in HH (sole earner 22% of HH) women in HH spend more time on housework, childcare, etc we observe men tend to be larger earner in HH (sole earner 22% of HH) women in HH spend more time on housework, childcare, etc

21. men specialize in market work paid work women specialize in nonmarket work unpaid work not necessarily complete specialization men specialize in market work paid work women specialize in nonmarket work unpaid work not necessarily complete specialization

22. how do we build a model to explain this? gains from specialization & trade how do we build a model to explain this? gains from specialization & trade

23. example: Ed & Liz choose between market & nonmarket work Liz $500 week in market work OR $400 week in nonmarket work OR something in between choose between market & nonmarket work Liz $500 week in market work OR $400 week in nonmarket work OR something in between

24. Ed $1000 week in market work OR $420 week in nonmarket work OR something in between Ed $1000 week in market work OR $420 week in nonmarket work OR something in between

25. market nonmarket 1000 420 500 400 Ed Liz

26. Ed has absolute advantage in BOTH market & nonmarket work 1000 > 500 420 > 400 why did he marry Liz? still gains from specializing & sharing output Ed has absolute advantage in BOTH market & nonmarket work 1000 > 500 420 > 400 why did he marry Liz? still gains from specializing & sharing output

27. comparative advantage Liz is close to Ed in nonmarket production but way worse in market production Liz has comp. adv. in nonmarket work gains to specializing Liz is close to Ed in nonmarket production but way worse in market production Liz has comp. adv. in nonmarket work gains to specializing

28. case 1: Ed & Liz do not share time divided 60% market work 40% nonmarket work do not share time divided 60% market work 40% nonmarket work do not share

29. Liz $300 in market work $160 in nonmarket work Ed $600 in market work $168 in nonmarket work Liz $300 in market work $160 in nonmarket work Ed $600 in market work $168 in nonmarket work

30. market nonmarket 1000 420 500 400

31. case 2: Ed & Liz specialize Ed does market work gives Liz 35% Liz does nonmarket work gives Ed 50% Ed does market work gives Liz 35% Liz does nonmarket work gives Ed 50%

32. resultsresults Ed produces $1000 gives Liz $350, keeps $650 Liz produces $400 gives Ed $200, keeps $200 Ed produces $1000 gives Liz $350, keeps $650 Liz produces $400 gives Ed $200, keeps $200

33. Ed $650 market, $200 nonmarket (case 1: $600, $168) Liz $350 market, $200 nonmarket (case 1: $300, $160) Ed $650 market, $200 nonmarket (case 1: $600, $168) Liz $350 market, $200 nonmarket (case 1: $300, $160)

34. market nonmarket 1000 420 500 400 Liz Ed By specializing, both Ed and Liz do better

35. why does this work? each specialize in what they do best, relative to their partner Liz specializing in nonmarket work frees Ed to specialize in market work which he does way better each specialize in what they do best, relative to their partner Liz specializing in nonmarket work frees Ed to specialize in market work which he does way better

36. specialization does NOT have to be complete for there to be gains 56% of married households both spouses in labor force specialization does NOT have to be complete for there to be gains 56% of married households both spouses in labor force

37. if men tend to have ab. or comp. adv. in market work, see men specializing in mkt. work, women specializing in nonmkt. work if men tend to have ab. or comp. adv. in market work, see men specializing in mkt. work, women specializing in nonmkt. work

38. men have absolute adv. in market work because they earn more gender earning gap reinforces the gender earnings gap men have absolute adv. in market work because they earn more gender earning gap reinforces the gender earnings gap

39. applicationapplication we observe that married men earn more than unmarried men 10-25% more when controlling for other differences (like age, education…) “marriage premium” we observe that married men earn more than unmarried men 10-25% more when controlling for other differences (like age, education…) “marriage premium”

40. why?why? division of labor married men have wife to specialize in nonmarket work (better focus on market work) division of labor married men have wife to specialize in nonmarket work (better focus on market work)

41. marriage is a signal: employer prefers married men, seen as more responsible, etc. self selection: people who get married tend to be more responsible, etc. in the first place marriage is a signal: employer prefers married men, seen as more responsible, etc. self selection: people who get married tend to be more responsible, etc. in the first place

43. drawbacks to specialization affects “power balance” in HH does partner that earns the $ get to make the decisions divorce partner specializing in nonmarket work at a disadvantage affects “power balance” in HH does partner that earns the $ get to make the decisions divorce partner specializing in nonmarket work at a disadvantage

44. nonmonetary issues value of family time stress & illness nonmonetary issues value of family time stress & illness

45. III. Marriage & Divorce marriage is a contract for HH formation specialization more likely marriage has origins as economic arrangement marriage is a contract for HH formation specialization more likely marriage has origins as economic arrangement

46. divorce & specialization if spouse specialized in nonmarket work, necessary to place value on that contribution if spouse specialized in nonmarket work, necessary to place value on that contribution

47. No Fault divorce obtain divorce without cause obtain divorce without consent of spouse arose in 1970s cause or consequence of rising divorce rates? obtain divorce without cause obtain divorce without consent of spouse arose in 1970s cause or consequence of rising divorce rates?

48. ConsequencesConsequences less costly to break marriage contract alimony for women much less common spouses have less leverage to extract financial settlement less costly to break marriage contract alimony for women much less common spouses have less leverage to extract financial settlement

49. 1985 Weitzman economic consequences of divorce women’s income decreases 27% men’s income increases 10% consequences of women specializing in nonmarket work economic consequences of divorce women’s income decreases 27% men’s income increases 10% consequences of women specializing in nonmarket work

50. 1999 Braver women’s income decreases 1% men’s income increases 2% today women more likely to be in the labor force better child support enforcement women’s income decreases 1% men’s income increases 2% today women more likely to be in the labor force better child support enforcement

51. men and divorce disadvantages to specializing in market work courts still favor women in custody decisions limited control of child support payments disadvantages to specializing in market work courts still favor women in custody decisions limited control of child support payments

52. divorce is costly to both parties legal costs splitting 1 HH into 2 HH acquire 2 of everything lose economies of scale legal costs splitting 1 HH into 2 HH acquire 2 of everything lose economies of scale

53. Government & marriage NOT neutral policies that favor & penalize marriage legal rights medical, financial decisions property inheritance adoption NOT neutral policies that favor & penalize marriage legal rights medical, financial decisions property inheritance adoption

54. taxestaxes nonmarket work is valuable, but not taxed implicit tax advantage to 1 earner HH nonmarket work is valuable, but not taxed implicit tax advantage to 1 earner HH

55. marriage penalty some married couples pay higher taxes than if they were single worst in 2-earner HH where incomes are close married couples with very unequal incomes have marriage bonus some married couples pay higher taxes than if they were single worst in 2-earner HH where incomes are close married couples with very unequal incomes have marriage bonus

56. How it works (2002) marriage penalty of $1502

57. 2001 tax changes reduced marriage penalty further reductions in 2003 taxes reduced marriage penalty further reductions in 2003 taxes

58. Social security benefits spouse is entitled to a benefit at least 50% as large as working spouse’s benefit even if never in labor force 1 earner HH may receive same SS benefits as 2 earner HH but paid less in payroll taxes spouse is entitled to a benefit at least 50% as large as working spouse’s benefit even if never in labor force 1 earner HH may receive same SS benefits as 2 earner HH but paid less in payroll taxes

59. SummarySummary look at U.S. HH benefits & costs to HH formation net benefits to forming married HH division of labor -- market vs. nonmarket work costly when HH splits look at U.S. HH benefits & costs to HH formation net benefits to forming married HH division of labor -- market vs. nonmarket work costly when HH splits